The nation's credit outlook has been downgraded to negative by Moody's due to the fact that the small nation has thus far failed to reach an agreement on the terms of repayment for $5.3 billion to Britain the the Netherlands, according to the AP.

This was money that the British and Dutch governments paid out to their citizens who lost money in Iceland-based accounts with the now collapsed bank brand Icesave. It's a bit of a silly dispute from afar since Iceland is risking the very stability of its financial system just to argue over the interest rates it should pay.

Problem is, Iceland's very act of trying to change repayment terms that were previously agreed to only degrades its credibility in the market further, thus increasing its future interest costs. The latest Moody's outlook downgrade makes it clear how Iceland's defiance is counter-productive.

The better long-term solution, even for Iceland, is to bite the bullet in the near-term and treat Britain and the Netherlands well... or at least as previously agreed. Doing so will reduce Iceland's future interest costs demanded from future creditors, by building its credibility as a quality debtor, and thus will make disputes like the current one far less likely to occur. It's a horrible time to be scaring off creditors since Iceland could easily go back to the brink of a liquidity crunch.